What Happens to Swiss Pillar 2 If You Move to the U.S.?

What Happens to Swiss Pillar 2 If You Move to the U.S.?

Swiss Pillar 2 and Relocation to the United States

When a U.S. Person works in Switzerland, they are required to make certain contributions to pension/retirement in Switzerland. The U.S. and Switzerland have entered into a totalization agreement and Swiss Pension follows the 3-Pillar system. In general, Pillar 1 is for OASI (similar to U.S. Social Security) Pillar 2 is for Occupational (similar to a 401K), and Pillar 3 refers to personal investments (similar to an IRA). Since the U.S. follows a worldwide income tax model for Individuals, these pension plans (specifically Pillar 2 and 3) are reportable for FBAR and FATCA. As to the taxation specifically of pension contributions, growth, and distributions, that can vary based on the specific tax position the U.S. Person takes. The purpose of this article is to discuss what happens to the Pillar 2 pension when a person moves out of Switzerland and to the United States.

The Pillar 2 Pension

It is not uncommon for employees and self-employed workers in Switzerland to relocate to another country including the United States. The Swiss government provides a breakdown of important FAQs involving what occurs with pillar 2. We have reproduced the applicable parts below:

What is a Pillar 2 Pension?

      • “You and your employer each pay half of your 2nd pillar contributions. Your employer may also decide to cover more than half.
      • You do not need to do anything. Your employer deducts your contributions directly from your salary, and transfers them to your account with their chosen pension fund.
      • If you are self-employed and decide to pay 2nd pillar contributions voluntarily, you can contact the pension fund of your choice to find out what you need to do.
      • 2nd pillar pension funds are run by private-sector pension providers. Each of these has its own regulations, so the amount that you need to transfer may differ from one to the next. It is not fixed.
      • If you change job, your new salary may be higher than your old one, or your new employer’s pension fund may offer better terms.
      • You might also have contribution gaps because you have not been paying 2nd pillar contributions all your life.
      • In these cases you can invest in your own 2nd pillar scheme by ‹buying› extra contribution years in the form of additional voluntary contributions (AVCs). The terms and conditions of the new pension fund apply.”

Are Pillar 2 Contributions Deductible?

      • “You can deduct the amount that you have paid into your 2nd pillar pension from tax.
      • Your new pension fund can supply information about options and conditions for investing in your occupational pension. Ask your employer for contact details.”

If you leave Switzerland for good

      • “You can have your 2nd pillar pension capital paid out early if you leave Switzerland for good.
      • However, this is not possible if you are going to settle in an EU or EFTA country. If you make your new home in one of these states, you will be insured by law there for pension, disability and survivors’ benefits.
      • In this case part of your occupational pension capital (known as the mandatory portion) must remain in a blocked account in Switzerland. It cannot be paid out until you reach regular retirement age, which is currently 64 for women and 65 for men. You can have the rest of your 2nd pillar savings (the extra-mandatory portion) paid out in cash.
      • Your pension provider can supply detailed information on withdrawing capital when leaving Switzerland for good.
      • If you are moving away from Switzerland permanently and still have a vested benefits account, don’t forget to take the balance with you!”

Taxes, FBAR and FATCA

From a Tax perspective, the Pillar 2 pension may avoid taxation on growth until distributions are made – based on the US/Switzerland treaty Analysis. Nevertheless, the Swiss Pension (Pillar 2 or 3) would be reportable for FBAR (Foreign Bank and Financial Account Reporting) and FATCA (Foreign Account Tax Compliance Act).

U.S. Persons and Pillar 2 Pension

For US persons who previously worked in Switzerland and have now relocated to the United States but still have a pillar to pension, it is important to update their employer and plan administrator of their relocation (or if they obtain U.S. Person Tax Status). Some types of retirement pensions can be transmuted into an investment insurance policy (usually Pillar 3) and other pensions may be able to be ‘cashed-out.’It is important to ensure the entire account, including the vested benefits and occupational pension capital are all transferred on the taxpayers’ behalf. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.